The wildly volatile market is taking its toll on option traders that are short option premium. The market has no trend with alternating triple digit days in both directions but still remaining in a sideways range.

This is a hard market for option sellers. We need the market to be at least somewhat directional instead of the up two days, down two days pattern. The last two days may have been the start of that trend. The Dow hit a five-week low intraday at 17,773 and the S&P at 2068. However, that 2068 print was right at the 100-day average which has been light support since early march. We have pierced it several times but only intraday.

The S&P fell out of its congestion ranve for the last four weeks and any further move lower could target 2040. However, dip buyers appeared at the bell and the S&P rebounded +12 points or more than 50% of its intraday loss to close down -9.


In the truth is stranger than fiction category the Russell 2000 actually gained +4 points for the day. The Russell only declined -1 point below Tuesday's low of 1212 and rebounded back into the green. It is hard to predict Thursday's market with the Russell in the green and the Dow and S&P recovering more than 50% of their losses going into the close. It would appear the dip buyers are alive and well.

The Russell closed exactly on its 100-day average at 1219 so that critical support level held.


Weighing on the markets this morning was the negative surprise on the ADP Employment. ADP said the U.S. added +169,000 jobs in April and the weakest month since January 2014. The forecast was for a gain of +200,000. Over the last ten years or 120+ reports the ADP has only missed estimates this badly a total of six times. On top of the miss the March gain of +189,000 jobs was revised down to +175,000.

The three month average gain of +181,000 is well below the average of 248,000 per month for all of 2014. Energy jobs are taking a toll on the employment numbers. The energy sector lost -14,000 jobs and manufacturing lost -10,000 as the two worst sectors.

The weaker than expected numbers suggest the Nonfarm payrolls on Friday will also be weak and that the economy is losing steam. While that could put off a Fed rate hike a weakening economy will not be good for the market. Most investors ignored the weak economics over the last three months because the Fed kept saying the economy was recovering modestly. Those assumptions are now being called into question and investors are wondering if stocks are reasonably priced.

Janet Yellen took aim at the equity market in a morning speech. She said "I would highlight that equity-market valuations at this point are generally quite high." She went on to warn that the market could act negatively to a Fed rate hike and bond yields could "see a sharp jump" when the fed hikes. The general consensus from a flurry of Fed speeches this week is that June is not off the table as a potential rate hike. I don't know how they can justify that given the economics but the Fed is determined to start the hike cycle as soon as possible. They want to start the cycle even if they don't hike again until 2016. Starting the cycle will generate the market reaction and that will have time to cool before the real hikes begin in 2016.

Yellen's warnings weighed on the market and put even more uncertainty into the market regarding Fed direction and the potential impact to equities. When there is increased uncertainty there is increased volatility.

The yield on the ten-year treasury spiked +2.94% to 2.25%. That yield has risen 21.6% since the 1.85% close on April 17th. That is a huge move in rates and Yellen is predicting an even bigger spike in the future. Rising yields in a weak economy is highly unusual and that is increasing the uncertainty.


After looking at a bunch of charts I think we have a greater potential for further declines over the next week than a material rally. There will probably be some short squeezes ahead but the trend should be lower. The volume on the up days has been very light with Monday's rally day coming on only 5.7 billion shares. Yesterday and today, both down significantly, came on 7.2 billion shares. As long as there is more volume on down days it suggests further declines. Therefore I am only adding bear-call spreads today.

Jim Brown

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Current Portfolio


Current positions



Current Position Changes


Stop Loss Updates

Check the graphic above for new stop losses in bright yellow. We need to always be prepared for an unexpected decline.


WYNN - Wynn Resorts (Stopped)

We were hammered by a big loss on WYNN when the stock spiked $7 at the open on Monday when MGM beat the street on earnings. While the outlook on Wynn has not changed the positive comments from the MGM earnings lifted the sector. MGM gets the bullk of its revenues from Las Vegas while Wynn has more exposure to Macau. The MGM said they saw record revenue from the gaming tables over the fight weekend. The McCarran airport has parking for 500 planes and they had to divert traffic to the North Vegas airport after all the slots filled up. The previous record was 350 parked planes for a Super Bowl. The fight weekend drew thousands of high rollers and they spent money. All these positive comments lifted Wynn even though their outlook is still gloomy. Shares retraced their gains over the following two days but we were stopped out on the spike.

I am going to reenter this position by selling the same June $120 call again. If the market is going lower there is no reason for investors to buy back into Wynn since they cut their dividend from $1.50 to 50 cents and guided lower on earnings and revenue for the rest of the year.

Closed June $120 call, entry $2.58, exit $3.65, -1.07 loss.

Reenter: Sell short June $120 call, currently $2.51, stop loss $118.85.

Retain the long June $125 call, entry $2.00, currently $1.36.



JKS - JinkoSolar (Update)

JinkoSolar is headed in the right direction but time is running out. We were stopped on the short put but continue to hold the long May $25 put with the stock at $27. Support has failed and with a negative market we could be in the money by next Friday's expiration. We don't need it to move much to recover the 15 cent loss on the short put exit. At this point i would be happy with a breakeven, which would mean the long put at .50 but I would take a profit if it is offered.

Closed short May $27 Put, entry .60, exit .75, -.15 loss.
Now long May $25 Put, entry .35, currently .25.



New Recommendations


UAL - United Continental (Bear Call Spread)

Airlines were flying high when oil prices were crashing but now that oil is at the highs for the year the airlines are coming back down to a hard landing. Rising competition from foreign airlines is another problem. This is not a long term forecast for UAL but i do expect oil prices to continue higher.

Sell short June $65 call, currently $1.26, stop loss $62.25
Buy long June $67.50 call, currently .81, no stop.
Net credit 45 cents.



LNG - Cheniere Energy (Bear Call Spread)

Cheniere Energy will be the largest exporter of LNG in the U.S. once their two facilities are complete. The first of 9 trains is expected to begin operation in Q4. Until then they will continue losing money because they are spending $20 billion or more to build these facilities. They reported a loss last week that was no different than their prior losses because they are not currently exporting. This should be no surprise to any energy investor but the stock weakened anyway. Long term LNG is a buy but they have touched a two month low twice in the last week. A breakdown could be imminent simply because of the weak market.

Sell short June $80 call, currently $1.46, stop loss $78.15
Buy long June $85 call, currently .67, no stop loss.
Net credit 70 cents.



FSLR - First Solar (Bear Call Spread)

The entire solar sector is breaking down with the exception of Solar City. I don't know if this is because of the Tesla battery announcement and the upside for Solar City or a bigger problem. First Solar spiked to $65 in late April but then reported a major earnings miss on April 30th. They reported a loss of 62 cents compared to estimates for 18 cents. Revenue of $469 million was also a major miss with estimates for $572 million. Shares are plunging at a high rate of speed as they give back those February gains.

Sell short June $60 call, currently 1.06, stop loss $58.25
Buy long June $62.50 call, currently .68, no stop.
Net credit 38 cents.



Existing Play Recommendations


Links to original play recommendation

$OVX - Oil Volatility Index (Bear Call Spread)

RCL - Royal Caribbean (Bear Call Spread)

GDX - Gold Miner ETF (Bear Call Spread)

JKS - JinkoSolar (Bull Put Spread)

BBBY - Bed Bath & Beyond (Bear Call Spread)

FB - Facebook (Bear Call Spread)

X - US Steel (Bear Call Spread)

WYNN - Wynn Resorts (Bear Call Spread)


Prices Quoted in Newsletter

At Option Investor we have a long-standing policy prohibiting the editors and staff from actually trading the individual recommendations in order to conform to SEC rules concerning trades.

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