I was able to find a couple more plays using the November strikes with only two weeks until expiration.
It is getting harder to find any premium left in November and with six weeks until the December expiration I am hesitant to add the longer strikes. After four weeks of market gains, we could be headed for some volatility and I would rather wait until that occurs to add December plays.
Premium on any stock that has already reported earnings is almost nonexistent. The risk has faded and nobody is willing to pay for the options. I am all for reduced risk but without premium it does us no good.
The market took a breather today but it was minimal. The Nasdaq lost only -2 points and the Russell 2000 only -1. However, the S&P gave back -7 and the Dow -50. Crude prices collapsed again and that knocked the props out from under the energy sector. Tech stocks continued to do well ahead of Facebook earnings.
Facebook pleased investors and shares gained +$4 after the close. That should be positive for the Nasdaq tomorrow and the Nasdaq 100 ($NDX) could make a new high.
All the index futures are slightly negative tonight but it is too early to draw any conclusions. I believe we will finish November higher but it is time for a decent bout of profit taking. I raised all the stop losses to take us out with a profit if the market does roll over.
A reader emailed and asked why I sometimes use wide strikes between the long and short options. His experience was with narrow strikes and minimum risk. You can write spreads using $1 strikes and a $2 spread but there is no profit in it. You might make 10-15 cents but your risk is $2 and you cannot really manage that with stop losses.
Since we are using stop losses to limit any losses, we can use a wider strike. Since the long strike is going to expire worthless anyway we want to spend as little as possible on that strike. The real reason we have the long strike is for margin purposes rather than insurance against a disaster.
In the Option Writer newsletter, we sell naked puts without the long strike. The margin is about 25% of the underlying. In writing the spreads, the margin is a fraction of that because the long strike acts as insurance whether it is used or not. The margin on the Alibaba put spread recommended today is only $761 for one contract.
The short answer to the question is "we don't plan on using the long strike so I want to spend as little as possible on it." The strike is a margin reduction tool rather than real insurance. If the play has little perceived risk, I will use a wide strike. If the play has higher risk I will use a narrow spread instead.
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Items shaded in blue were previously closed.
Current Position Changes
Stop Loss Updates
Check the graphic above for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline.
WYNN - Wynn Resorts
Wynn spiked up again on more promises from the Chinese government to remedy the problems in the Maccau casino environment. We were stopped out of the short call at $70.25. I put a stop loss on the long call just in case Wynn shares do not continue higher.
Stopped Nov $75 short call, entry .92, exit $1.85, -.93 loss
Retain Nov $85 long call, entry .32, currently .38, stop loss $70.85.
HOG - Harley Davidson
Harley spiked +$3 on the 29th on no news. I could not find a reason for the rally and shares stalled at $50. Shares are too close to resell a $50 strike and the $55 strike has no premium.
Stopped Nov $50 short call, entry .54, exit .48, +.06 gain.
Retain Nov $55 long call, entry .08, currently .02.
RRGB - Red Robin Gourmet Burgers (Call Spread)
Red Robin beat on earnings but missed on revenue. In addition they guided lower for future sales. Dame store sales in Q3 were +3.5% but they guided for only +2.5% in Q4, down from +3.0% in prior guidance. They also guided for revenue growth of 11% rather than prior guidance of 12%.
Shares collapsed on Tuesday and then dropped another $4 today. They are now below support and could continue declining to $50.
Sell short Nov $70 call, currently .65, stop loss $68.25
Buy long Nov $80 call, currently .10, no stop.
Net credit 55 cents.
BABA - Alibaba (Put Spread)
Since reporting earnings and the Chinese government adding more stimulus to the market Alibaba has been on a vertical journey that has added more than $25 over the last six weeks. I am recommending a deep OTM put spread for November with two weeks to go. This will only gain us a few cents but the risk appears to be minimal.
Sell short Nov $78 put, currently .54, stop loss $81.65
Buy long Nov $70 put, currently .15, no stop.
Net credit 39 cents.
Existing Play Recommendations
Links to original play recommendation
ADI - Analog Devices (Put Spread)
XBI - Biotech ETF (Bear Call Spread)
MON - Monsanto (Put Spread)
WYNN - Wynn Resorts (Call Spread)
HOG - Harley Davidson (Call Spread)
XBI - Biotech ETF (Put Spread)
LRCX - Lam Research (Put 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.
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.