E-mini S&P 500 Futures open this morning and have been trading in a choppy range. Although futures are trading higher by around 12 points right now we have seen them trade in a 10 point range today. Equity markets seem to be holding their bid for now as January factory orders were released this morning and topped analyst expectations. There are no more major data releases today so eyes will be on individual stocks and earnings stories.  This morning saw retailer Michael Kors Holdings Limited (KORS) release quarterly earnings besting expectations and sending the stock higher by nearly 19%. We are currently long the KORS Feb 7^th weekly 83-84 call spreads that appear to be going to full value. More upscale retailers are reporting tomorrow with Ralph Lauren Corporation (RL), and The Estee Lauder Companies Inc. (EL) scheduled to release quarterly earnings results before the open tomorrow. We will examine these names into the close as luxury and upper scale retailers have been doing well for us.

Furiex Pharmaceuticals, Inc (FURX) is a drug development company with several programs in development.  The company’s stock is currently trading around $111.95 and is up more than 140% in today’s trading session.  The stock has more than doubled today on news that two drugs they had in Phase III trials came in line with both FDA and EMA guidelines. This move in the stock was telegraphed somewhat by an unusual options trade we flagged on January 22^nd. On Jan 22^nd we flagged a buyer of 1,000 Feb 50 Calls for $7.50. This trader had to lay out $750,000 in capital to put this trade on. Today these calls are trading around $65.00. This means that this trader profited over $5.7 million on this trade. This is a huge return and a shining example of how unusual option activity can help us find homeruns like this. We also flagged activity in FURX back in December and featured it in our Covered Call Newsletter when stock was trading near $41.00. That trade netted an annualized return of 154%. This trade was also based on unusual option activity.

U.S. equity markets accelerated their sell off today after January ISM numbers came in much worse than expected. The number came in at the lowest levels in eight months sparking acceleration to the sell off and sending E-mini S&P 500 futures lower by over 40 points by the close. We also saw a huge bid higher in the VIX with the index closing at 21.44, up over 16%. Gold markets also responded to the selloff in equities and rallied $17.00. Tomorrow will see the release of more manufacturing data with Factory Orders set to be released at 10am ET. After today’s price action eyes will surely be on the release of the Employment Situation this Friday as traders continue to struggle to find direction in this market.  We continued to move to cash today and will continue to look for stocks that may have been oversold in the past 2 weeks. As far as earnings plays we shorted YUM via options and got long KORS. Neither company has released their results yet so whether or not these trades are successful remains to be seen.

YUM! Brands, Inc (YUM) is a fast food restaurant operating nearly 40,000 stores around the world.  The company’s stock is currently trading around $66.65 in a 52 week range of $59.68-$78.68. The stock had a relatively sideways year with shares only rallying 1.11% over the past 12 months.  The company’s is set to report earnings after the bell today with analysts expecting earnings of $0.80 per share on revenues of $4.3 billion. Historically, the stock is a relatively mixed performer on earnings with shares rallying 4 times and selling off 4 times on earnings day over the past 8 quarters. The stock sees an average earnings day move of 3.9% and the options market is currently implying a move of around 6.5% by this Friday’s expiration. The larger than average expected move might be explained by concerns over an economic slowdown in China, as YUM has large exposure to China. YUM is also trading in bearish territory on a chart with shares trading well below the Ichimoku Cloud and the future cloud sloping downward.  We believe that historical performance in YUM coupled with China concerns signal for a short ahead of earnings. We will be looking to get short YUM via options near the close with a downside price target around $4.30 lower.

With the first half of the first session in February behind us we see a selloff in equity markets as weak domestic data as well as economic data from abroad weigh on U.S. markets.  E-mini S&P 500 futures are currently trading lower by 13.50 points but are off the lows. January ISM numbers were released this morning missing consensus estimates and showing a much slower than expected pace of manufacturing growth. Global markets were under pressure as well as a release of China’s PMI index for January came in weak adding to the concerns of an economic slowdown in China.  Large moves lower in Asian equities may have been partly explained by thin trading dues to the holiday but the data still shows factory growth slowing the most it has in 6 months.  U.S. equities seem to have slowed their decline, but the VIX did trade above 20 briefly this morning.  Yum! Brands Inc. (YUM) earnings are set to be released tonight and will be closely watched due to their large China exposure. We continue to be cautious about new longs at these levels and have begun to look for small hedges where we can. We still believe that the market can head higher this quarter but is likely to be under pressure in the short term.

Equity markets end the month with a moderately lower session as ES futures rally through the day and close well off the lows. The market was under pressure today as emerging market concerns continue to weigh on stocks. Personal Income and Outlays was released this morning as well with data showing lower than expected growth in both personal income and spending. ES futures spent a shot time in positive territory before selling off into the close. Next week will see the release of the January employment situation and this number will undoubtedly be closely watched by traders and investors around the world.  Price action into the close indicates continuing concern over emerging markets and currency concerns. Traders likely trimmed long exposure due to headline risk over the weekend.  The first half of next week however does not see a lot of data releases so eyes will be on earnings. Earnings have been mixed with companies like MasterCard Inc. (MA) reporting below estimates while tech companies like Facebook (FB) have been performing well.  We remain long the market but have been establishing small shorts in weaker stocks.

Digital Generation, Inc. (DGIT) is a company engaged in the distribution of ad campaigns both online and on television.  The company’s stock is currently trading around $13.60 in a 52 week range of $5.78-$14.24. The stock performed very well last year with shares gaining just under 36% in the past 12 months. Options action in DGIT today suggests that traders believe the stock will continue this trend through September expiration. Early in the session a trader sold 2,000 DGIT Sep 15 puts for $2.77. This was labeled as an opening position and this sale of in the money puts represents some very bullish speculation.  While this may not seem like a large block this trade represents volume over 9 times the average daily option volume in DGIT. The stock is also trading well above the Ichimoku Cloud and the future cloud is upward sloping indicating the stock could have more room to the upside. We believe that the strong chart and very bullish order flow present a good opportunity for a long in DGIT with a price target north of $15.00.

Equity markets are trading lower through the open today as emerging market concerns continue to weigh on stocks. Personal Income and Outlays was released this morning as well with data showing lower than expected growth in both personal income and spending. December Chicago PMI was also released today coming in just above consensus estimates. Earnings misses by companies such as Mastercard (MA) add to the slide. Although futures are off the lows nearly all of the week’s gains have been erased. It seems likely that we will end the last trading day of the month in negative territory as traders sell into the weekend ahead of potential action by central banks around the word. Next week will not see very many economic data releases so attention will remain on emerging markets.  Through the next weeks we will continue to lean to the long side using relief days like yesterday as an opportunity to take profits.

A trader bought about 5,000 contracts of Hillshire Brands $HSH Feb 37 Calls for about $0.75 (62 times the usual volume) with stock at $34.70. Further, the stock stocks are up about 1.1% although overall stocks are down for the day in the US. The Hillshire Brands Company announced it will broadcast its review of second quarter and first half of fiscal year 2014 via the internet, live on Thursday, January 30, 2014 at 9:30 am CST.  This announcement may have played a role in the trader’s decision to purchase the large amount of options, perhaps upon positive knowledge regarding the upcoming earnings report. With order flow this strong we believe there is a very high level of probability the stock continues to rally through February expiration. (more…)

Auxilium Pharmaceuticals, Inc. (NASDAQ: AUXL) has gained over 13% since January 7^th 2014.  I normally approach stocks trading on their highs with caution.  However, when dealing with a pharmaceutical it is wise to examine the fundamentals to determine if the move is justified.  On January 8^th 2014 AUXL released interim data from its Phase 4 retreatment study (AUX-CC-862) evaluating XIAFLEX® and clearly the market like it.  This announcement coupled with the market’s reaction suggests investor’s belief in the drug and its potential to the company’s bottom line.  It is also possible the move higher is driven by short covering.  As a rule professional investors do not cover at the top unless they feel the company’s prospects have changed.   The action in the option market today points to a large player rolling the Jan 22 calls out to the Mar 25 calls which is bullish.  Given the option activity post announcement and the continued strength in the stock it is very possible AUXL will continue this move even if it’s at a slower pace.  I view any retracement in AUXL as an opportunity to establish a long position.  I further would use the 100 day moving VWAP (19.03 on 1/14/14) as my stop loss point, adjusting the stop each day.  This level is far enough below the market to give the position a chance, yet not so far as to risk unnecessary capital.

Trade: Long the AUXL March 25 Calls for 1.35
Risk: $135 per 1 lot
Reward: Unlimited