There have been four direction changes in the market in the last two weeks. Each saw moves of more than 500 Dow points in opposite directions. Will the real market please stand up.
It is practically impossible to hold on to short positions in a market that is changing directions so quickly. It was a miracle we escaped the December option series without a loss for the month. We are starting with January in a hole after the Dow dropped -540 points on the 11-14th, rallied +569 points from 14th to 17th, dropped -680 points from 17th to 21st and then rebounded +584 points in the last two days.
Switching to an index/sector ETF plan last week did not help with that kind of volatility.
The market is finally showing its seasonally bullish bias but two days does not make a trend. Given the volatility and direction changes over the last two weeks we do not know if there is another 600 point drop ahead.
The last week of December is normally up the first two days and down the last two days. With New Years on a Friday, that compresses the cycle. If the trend holds, Monday should be up, Tuesday flat, Wednesday and Thursday down. January has been seriously negative the last two years but was strongly bullish the prior three years. With earnings and economics weak this could be another negative January.
I am going to err on the side of caution and not add any new plays today. The market direction is too unstable and the weak holiday volume accentuates the moves. There is plenty of time for new trades as long as we have capital to invest.
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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.
Somehow, we escaped the December volatility with a breakeven for the December option series. We were stopped out on almost every play regardless of whether it was a call or a put spread. The Dow made three 700 point moves in opposite directions and made a two-month low on Dec 14th. This is crazy volatility and this last week has been a carbon copy. It is practically impossible to manage short positions in that kind of volatility.
SMH - Semiconductor ETF
The chip sector crashed with the market last week and broke through support on Monday after the quadruple witching expiration. Qualcomm earnings and downgrades on GoPro weighed on the sector. We were stopped out of the short side for no loss and we still have the long put but it is not likely to finish near the money unless the tech sector crashes in January. I looked at launching a new short but the premkum today and the new downtrend is not worth the risk.
Stopped Jan $52 short put, entry .63, exit .63, zero gain.
Retain Jan $46 long put, entry .45.
SPY - S&P-500 SPDR ETF
The S&P-500 dropped -71 points in two days from the 2,076 open on the 17th to the 2005 low on the 18th. The speed of the decline inflated the premium and we took a sizeable loss on the play. After the two-day decline the S&P has recovered to 2,064 but the put premiums have evaporated to nothing after a two day rally. I looked at launching a new short put but the 25 cents we would get is not worth the risk. The S&P is at resistance again and we could see another big decline in the next several days.
Stopped Jan Week 2 $195 Put, entry .50, exit $1.50, -$1.00 loss
Retain Jan Week 2 $190 long put, entry .28.
Original Play Recommendations (Alpha by Symbol)
CME - Chicago Mercantile Exchange (Put Spread)
Chicago Mercantile is the U.S. futures exchange and they are doing a thriving business with the directional moves in the commodity sector. With today's close at $98.25 they are within $2 of a new closing high.
Earnings Feb 4th.
Sell Jan $92.50 put, currently $1.45, stop loss $95.25
Buy long Jan $85 put, currently .55, no stop loss
Net credit 90 cents.
FIT - FitBit (Put Spread)
Fitbit has been almost impervious to the market weakness until today. The stock benefitted from two positive articles in Barrons last week and rallied to a four week high. Today's dip inflated the put premiums. I am recommending the Jan $26 short put and that would be a new historic low if the stock actually declined to that level. We saw good support just above that level in late November.
Earnings Jan 28th.
Sell short Jan $26 put, currently $1.10, stop loss $27.75
Buy long Jan $22 put, currently .60, no stop loss.
Net credit 50 cents.
IWM - Russell 2000 ETF (Put Spread)
The next two weeks are typically the best two weeks of the year for the small cap stocks. However, you could not tell it from the decline today. The Russell fell -8 points while the other major indexes posted gains. However, there is decent support at 1,100 and I do believe a late year rally will appear. It may not be as strong as normal but we should see some gains.
I am picking strikes 115 points below the current index level at 1,115. I can't conceive of another 115 point drop in the next two weeks but this is the stock market and anything is possible but still not probable.
Sell short Jan $100 put, currently .53, stop loss $105.75
Buy long Jan $95 put, currently .27, no stop loss
Net credit 26 cents
QQQ - Nasdaq 100 ETF (Put Spread)
The Nasdaq 100 has sold off less than the other major indexes relative to its Aug/Sep lows. Large cap tech stocks are likely to be favored as window dressing for the end of December portfolio markup. With the QQQ declining only -4 points over the last week I seriously doubt it will drop another 10 to our short strike over the next several weeks. If it did that would be a major market meltdown.
Sell short Jan $100 put, currently .47, stop loss $105.75
Buy long Jan $94 put, currently .21, no stop loss
Net credit 26 cents.
SMH - Semiconductor ETF (Put Spread)
Semiconductors are in an uptrend and tech stocks normally do well over the next three weeks. I am recommending a $52 put that is under the November lows. The low in December was $53.37.
Sell short Jan $52 put, currently .55, stop loss $53.35
Buy long Jan $46 put, currently .20, no stop.
Net credit 35 cents.
SPY - S&P-500 ETF (Put Spread)
The S&P has rallied +80 points since the 1993 low on Monday. With the next two weeks normally bullish or at least not bearish I am adding a well out of the money put spread on the SPY.
I am using the January week 2 strikes with expiration on Jan 8th. No need to risk a January meltdown.
Sell short Jan Week 2 $195 put, currently .68, stop loss $201.25
Buy long Jan $190 put, currently .38, no stop loss
Net credit 30 cents.
SWKS - Skyworks Solutions (Put Spread)
Skyworks is in rally mode after another Apple supplier Avago (AVGO) reported full year earnings that spiked 83% last week. Investors were afraid that Apple was cutting orders for iPhone components and apparently Avago had not seen those cuts. Q3 revenue rose +16% and earnings +26%. This boosted all the Apple component suppliers including Skyworks.
Earnings are Jan 21st.
Sell short Jan $75 put, currently $1.35, stop loss $79.25
Buy long Jan $65 put, currently .40, no stop.
Net credit 95 cents.
WYNN - Wynn Resorts (Put Spread)
Steven Wynn surprised everyone by purchasing over 1.0 million shares of WYNN stock over the last week according to an SEC filing. This gives him control of more than 11.07 million shares. Steve has always been a buyer on the dips. He knows what his franchise is worth and when the shares are cheap he steps in. When they are expensive he sells a few.
This purchase cost him about $62 million. That is a huge vote of confidence that suggests shares are not going lower. The bad news in Macau cannot get much worse and it is about time for some good news.
Earnings are Feb 3rd.
Sell short Jan $55 put, currently .95, stop loss $58.85
Buy long Jan $45 put, currently .45, no stop loss.
Net credit 50 cents.
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.
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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.