The Signal Newsletter - Safe Option Strategies · No advice is ever given to buy or sell and any trading with real money is done at the subscribers own potential risk.2 The Signal

The Signal

The Safe Option Strategy

Valero Energy Corp (VLO) Bull Put Spread

The Safe Option Strategy

STO Dec15 $67.50 Strike Puts - $1.71 Credit BTO Dec15 $62.50 Strike Puts - $0.70 Debit Total Credit $1.01 Per Share Max Risk is $3.99 Per share Limit Credit Order of $0.95 to open the trade Target ROI is 25% Max ROI 26% Target time in trade is <30 days

Trade Explanation of the Bull Put Spread

Click on the link above to see the definition of the spread trade.

The Signal

The best weekly

newsletter for the

serious options trader.

November 9, 2015

By Safe Option Strategies www.safeoptionstrategies.com

http://www.safeoptionstrategies.com/

Safe Option Strategies LLC. does not advise any buying or selling of any securities nor any derivatives thereof. The information contained in this newsletter is for educational purposes only. Trading securities and options can generate substantial profits and losses. No advice is ever given to buy or sell and any trading with real money is done at the subscribers own potential risk.2

The Signal Company Technical’s

Summary

VLO had a great earnings report a week ago, and have stayed on the rise since. They are a strong stock, and have their most recent support at $67.50. Still, this is an aggressive bull put spread, and not for the faint of heart. DO NOT enter this trade if you are not OK with owning and collaring the stock.


The Signal

The Primary Exit Plan

The primary exit for this trade is to let both options expire worthless at options expiration. If this happens, we

book our max profit on the trade ($1.01 per share in this case). If the stock price moves up strong in the next

week and we can get out ahead of expiration with half or more of our target profit we will do so.

Adjustment for Bearish Trend

If the stock price were to move bearish, there are several ways to adjust the trade: 1) We could allow stock to

be put to us for $67.50 per share (our short put strike price). We would also roll our long puts out in

expiration, and possibly to a strike price one or two strikes lower. Then we would add short calls (strike and

month to be determined based on where the stock price is trading when this actually happens) and we would

be in a perfect collar trade. 2) We could try to exit the trade by buying to close our short puts at our

theoretical breakeven point. This is the strike price of the short puts minus the total net credit in the trade

($66.49 in this case). If we do this, we would then sell the long puts for whatever value they still have and

possibly book some profit in the process. 3) The last choice would be to roll the whole trade out in time and

down in strike prices, but this is a tricky adjustment, and one we would not likely do on this trade.


The Signal

Trade Updates

SBUX Call Calendar (11/02) – Even with the little bit of pullback since we opened the trade, we are sitting at break even right now. Our short calls have lost exactly the same amount of value as our long calls. SBUX has not crossed over to bearish territory, so no changes today. UA Bear Call (10/26) – Today’s move down in the stock price took UA from being upside-down, to being profitable. Not enough to close yet, but getting close. No change today. COST ITM Bull Call (10/05) – It is looking more and more like we are going to let this trade go to expiration. The bid/ask spread still make it difficult to close for the profit we want. However, if it could be closed for a limit credit of $4.90 or more, getting out now would not be a bad choice. We are staying in. NFLX Bear Put Calendar for those NOT wishing to Collar $95.00/$94.29 (09/14) – No change today. NFLX dropped in price today, along with most of the rest of the market. It doesn’t give us reason to panic.

Watch for the Signals

Signals to Watch for in the Upcoming Week

and Why. Economic Reports

Nov 10 Export Prices ex-ag. Oct Nov 10 Import Prices ex-oil Oct Nov 10 Wholesale Inventories Sep Nov 12 MBA Mortgage Index 11/07 Nov 12 Initial Claims 11/07 Nov 12 Continuing Claims 10/31 Nov 12 JOLTS - Job Openings Sep Nov 12 Crude Inventories 11/07 Nov 12 Treasury Budget Oct Nov 13 PPI Oct

Nov 13 Core PPI Oct

Nov 13 Retail Sales Oct Nov 13 Retail Sales ex-auto Oct Nov 13 Mich Sentiment Nov Nov 13 Business Inventories Sep Nov 13 Natural Gas Inventories 11/07 Watch the Reports

Wholesale Inventories

Highlights

Wholesale inventories increased 0.1% in August after a downwardly revised 0.3% decline (from -0.1%) in July. The Briefing.com Consensus expected no change in wholesale inventories.


The Signal Key Factors

Durable wholesale inventories increased 0.3% after declining 0.1% in July. A 0.3% decline in automotive inventories was offset by a 0.9% increase in electrical inventories and a 0.5% increase in machinery inventories. Nondurable wholesale inventories declined 0.2% in August after declining 0.5% in July. For a second consecutive month, lower oil prices helped reduce petroleum inventories (-1.4%). Farm product inventories declined 3.1% after declining 1.2% in July. Wholesale sales fell 1.0% in August after decreasing 0.3% in July. Durable wholesale sales fell 1.2% in August after increasing 1.1% in July. A large chunk of the decline came from a 2.7% drop in automotive sales. Nondurable wholesale sales declined 0.7%. The inventory-to-sales ratio increased to 1.31 in August from 1.30 in July. That is the largest ratio since May 2009. Prior to the Great Recession, the inventory-to-sales ratio hadn’t been that high since November 2001.

Big Picture

Wholesale inventories are just one component of total business inventories. Manufacturing and retail inventories make up the rest of total business inventories. The market ignores this release and doesn't pay much attention to the full business inventory release that comes a few days later. Improved inventory management in recent years has reduced the economic swings associated with inventories and has helped produce a long-term downtrend in the inventory-to-sales ratio.

Initial and Continuing Claims

Highlights

Initial claims for the week ending October 31 increased 16,000 to 276,000 (Briefing.com consensus 262,000) from an unrevised 260,000 level in the prior week. Continuing claims for the week ending October 24

increased 17,000 to 2.163 million (Briefing.com consensus 2.145 mln) from the prior week's upwardly revised level of 2.146 million (from 2.144 mln).

Key Factors

The four-week moving average for initial claims increased by 3,500 to 259,250. There were no special factors influencing the jump in initial claims, which are still running at encouragingly low levels. The four-week moving average for continuing claims declined by 11,500 to 2.162 million, which is the lowest level since November 11, 2000.

Big Picture

The latest initial claims reading is the highest level for initial claims since late September, but pretty much in the middle of the 250,000 to 300,000 range that has predominated since July 2014. The overall trend initial claims supports a labor market that is at, or very near, full employment.

Treasury Budget

Highlights

The Treasury Budget showed a surplus of $91.1 bln in September, down from a surplus of $105.8 bln in September 2014. The Treasury data are not seasonally adjusted, and the September surplus cannot be compared to the $64.4 bln deficit in August.

Key Factors

The CBO estimated that the surplus would be slightly larger at $95.0 bln. Total revenues increased by $14.2 bln, from $351.2 bln in September 2014 to $365.5 bln in September 2015. Total outlays increased to $274.4 bln in September 2015 from $245.4 bln in September 2014, a gain of $29.0 bln. September marked the end of the 2015 fiscal year. The overall yearly deficit shrunk by $44.7 bln to $438.9


The Signal bln in FY 2015 from $483.4 bln in FY 2014.

Big Picture

Raw data available at: www.fiscal.treasury.gov/fsreports/rpt/mthTreasStmt/current.htm

Producer Price Index (PPI)

Highlights

Producer prices declined 0.5% in September after being unchanged in August. The Briefing.com Consensus expected the PPI to decrease 0.3%. Excluding food and energy, core PPI declined 0.3% in September after increasing 0.3% in August. The consensus expected these prices to increase 0.1%.

Key Factors

Final demand for goods declined 1.2% in September after decreasing 0.6% in August. That was the largest decline in final demand for goods prices since a 1.9% decline in January. The entire decline in goods prices can be attributed drops in food and energy costs. After declining 3.3% in August, energy prices fell 5.9% in September. Even though spot crude prices actually increased during the month, gasoline prices – which impact the PPI report – declined 16.6% in September. Food prices declined 0.8% in September. Final demand for services, which had contributed significantly to core PPI growth over the past few months, declined 0.4% in September. That was the largest decline since a 0.5% decline in February. Trade prices declined 0.4% in September and transportation and warehousing prices declined 0.7%. Final demand excluding food, energy, and trade declined 0.3% in September. Pipeline pressures continued to weaken. Core processed intermediate goods prices declined 0.6% in September after declining 0.2% in August. That was the largest decline in these prices since January. Core unprocessed intermediate goods prices declined 1.1%,

its third consecutive monthly decline. Intermediate services prices declined 0.7% in September.

Big Picture

There are no pricing pressures down the producer pipeline. This should keep both consumer and producer price growth in check.

Retail Sales

Highlights

Retail sales increased 0.1% in September after a downward revision resulted in no growth (from 0.2%) in August. The Briefing.com Consensus expected retail sales to increase 0.2%.

Excluding autos, retail sales declined 0.3% in September after declining a downwardly revised 0.1% (from +0.1%) in August. The consensus expected these sales to decline 0.1%.

Core sales, which exclude auto dealers, gasoline stations, and building materials and supply stores, increased 0.1% in September. That was down from a downwardly revised 0.2% increase (from 0.5%) in August. These sales are more closely aligned with the goods consumption data in GDP and make a dismal retail sales report look a little more palatable.

Key Factors

The story out of the retail sector remains the same. This was another month where falling energy prices should have helped drive up sales of more discretionary and luxury goods. Instead, lackluster income growth has failed to foster an acceleration in consumer demand, and consumers are more willing to pocket their gasoline price savings than spend them.

Until wage growth picks up, retail demand will continue to look sluggish. To that end, the September employment report showed that aggregate wages actually declined that month. There was very little reason to expect a change in consumption trends at this time.

http://www.fiscal.treasury.gov/fsreports/rpt/mthTreasStmt/current.htm

http://www.fiscal.treasury.gov/fsreports/rpt/mthTreasStmt/current.htm


The Signal The one bright spot in September was the motor

vehicle sector. Spending at auto dealers rose 1.8%, which was in-line with the impressive reports from the motor vehicle manufacturers that were released a couple of weeks ago.

Much of the decline in sales excluding autos stemmed from lower gasoline prices, which helped cause sales at gasoline stations to decline 3.2% in September. Other areas of weakness included electronic stores (-0.2%), building material and supply dealers (-0.3%), and food and beverage stores (-0.3%).

Sales at clothing and sporting goods stores both increased 0.9% in September.

Big Picture

Without significant improvements in income growth, retail sales gains will continue to be weak.

Michigan Sentiment

Highlights

The University of Michigan Consumer Sentiment Index was revised down to 90.0 in the final October reading from 92.1 in the preliminary report. The Briefing.com Consensus expected the index to be revised up to 92.6.

Key Factors

Despite the downward revision, sentiment remains stronger than the final September (87.2) level. The Current Conditions Index was revised down to 102.3 in the final October reading from 106.7. The Expectations Index was revised down to 82.1 from 82.7. The downward revisions come during a time that the initial claims level has reached multi-decade lows and gasoline prices remain relatively weak. These trends suggest that volatility in the equity markets has been influential in reducing sentiment levels. Regardless of the decline, the impact on consumption trends will likely be minimal. Consumption

relies on income and not changes in sentiment. As long as the employment sector continues to improve, consumption growth should follow.

Big Picture

Consumer sentiment has little influence on consumption. As long as payroll levels continue to expand, the resulting income growth should keep consumption gains steady regardless of the monthly ebbs and flows in sentiment.

Business Inventories

Highlights

Business inventories were flat for a second consecutive month in August following a slight downward revision (from 0.1%) in July. The Briefing.com Consensus expected business inventories to increase 0.1%.

Key Factors

Manufacturer (-0.3%) and merchant wholesalers (0.1%) already reported their August results. The only piece of new information was that retailer inventories increased 0.3% in August after increasing 0.7% in July. All major retailer sectors posted positive increases in inventory levels. That included a 0.7% increase in building material and supply store inventories, a 0.4% increase in clothing store inventories, and a 0.2% increase in motor vehicle and parts dealer inventories. Total business sales declined 0.6% in August after increasing 0.1% in July. Sales in all three business sectors - manufacturing (-0.7%), retailer (-0.1%), and merchant wholesales (-1.0%) – declined in August. The inventory-to-sales ratio increased to 1.37 in August from 1.36 in July.

Big Picture

Business inventories include wholesale inventories, manufacturing inventories, and retail inventories. Inventories are a component of GDP, and thus are of


The Signal interest to economists, but the financial markets don't pay much attention to this release. Despite better inventory management techniques, inventory growth

has outpaced sales for the past few years.


The Signal

The Watch List

Symbol Earnings HD 11/17 BBY 11/18 DE 11/25 SWHC 12/07 COST 12/08 ADBE 12/10 RHT 12/16 NKE 12/16 MON 01/05 NFLX 01/18 BA 01/21 EBAY 01/21 SNDK 01/21 CAT 01/22 P 01/22 UA 01/22 AAPL 01/27 F 01/27 V 01/27 GRMN 01/28 WBA 01/28 VLO 01/28 BIDU 01/29 XOM 01/29 SBUX 01/29 CVX 01/30 FSLR 01/29 FB 02/04 DIS 02/05 TM 02/06


The Signal The Bull Put Spread

A credit spread, the bull put uses a credit on a short, out of the money option as the primary option, with a long put

option one or two strikes lower as the hedging option. The short put is typically placed at or below a strong level of

support, and as the name of the trade suggests, when the stock is in a bullish pattern. The ideal scenario is for both

options to expire worthless which allows us to book our maximum profit.

Documents

The Signal Newsletter - Safe Option Strategies · No advice is ever given to buy or sell and any trading with real money is done at the subscribers own potential risk.2 The Signal