The Chinese markets did not melt down after a flurry of economic reports Monday night and the U.S. futures are up strongly.
While it is impossible to predict whether the S&P futures will hold at the current +12 it would be a good start for the week. The general negativity over China, economics, earnings and oil prices were major factors in the market drop last week it was also an option expiration Friday ahead of a three-day weekend. This was the perfect storm of factors that combined to crush the market and send investor sentiment off the cliff.
I am publishing this newsletter today for two reasons. The first is to show the recap for the January option cycle. It was a bad month and the market is down -10%. There is not a lot we can do about that. Fortunately, once it finds a bottom we should be able to launch some plays to profit from the eventual rebound.
The second reason for this newsletter on a Monday is to announce the shift of the Monthly Cash Machine plays into the Option Writer newsletter. The two newsletters are very similar with the exception the Option Writer also has covered calls and naked puts as well as spreads. I am duplicating effort by publishing two newsletters with similar plays.
The Option Writer newsletter was published on Monday's but after today I am moving it to Wednesday into the Monthly Cash Machine slot.
The Cash Machine plays will have their own section in the OW newsletter. Look for the heading Monthly Cash Machine inside the newsletter.
Unfortunately, I cannot do anything with the market. No amount of scheduling changes or content movement can overcome a market correction. In a correction, there are always brief periods of reverse volatility with multiple short squeezes that are eventually sold. It may seem like the market just wants to go down but that is not the case. With alternating 300-point days on the Dow, it is not safe to launch either bullish or bearish plays. We simply have to bide our time and wait for the volatility to ease and the market to pick a longer-term direction.
While we wait, I will continue to try and pick some low volatility ETF spreads in hopes of finding some mild tranquility.
Look for MCM plays in the OW newsletter that will be out later today and then on Wednesday's in the future.
Send Jim an email
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.
January Position Recap
I do not have to tell anyone that January was a bad month. The markets have declined -10% or more in just the last three weeks. We are lucky the performance was not worse. Skyworks and the SPY were the big losers with major gaps down in both positions that put us well underwater.
None - See Option Writer Newsletter
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.
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
OIH - Market Vectors Oil Service ETF (Call Spread)
The OIH is supposed to replicate the Oil Service Index, which represents U.S. listed companies that are involved in oil services to the upstream oil sector, which includes drillers, producers, etc. The service sector is in real trouble. With the price of oil collapsing and companies taking rigs out of service at a record rate the demand for oil services is shrinking fast. Oil is not expected to firm until May although we could see some short term spikes from short covering or based on headlines.
Service companies that have work are being forced to discount their prices deeper every month in order to win contracts. Producers claim their new contracts are 25% to 40% below the rates they paid this time last year.
The XLE also offers an attractive spread using the 59.50/63.50 calls with a 29-cent net credit.
Sell short Feb $25 call, currently 39 cents, stop loss $24.25
Buy long Feb $29 call, currently 6 cents, no stop loss.
Net credit 33 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.
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.
Updare 12/30/15: We were stopped on the short side a couple weeks ago for a loss. The stock has been behaving fairly well and I am going to try and squeeze in another play to go with the long put we are holding. If you are NOT still holding the long put then don't enter this play.
Sell short Jan $73 put, currently .50, stop loss $75.95
Retain Jan $65 long put.
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 $45 put, currently .45, no stop loss.
Net credit 50 cents.
VXX - Vix Futures ETF (Call Spread)
The VXX is the ETF for the Volatility Index ($VIX). You can buy options on both but the options on the VIX are more expensive and has fewer strikes. The VXX has only traded over 38 once since 2014 and it was for a single day. The huge market volatility over the last couple of weeks has only succeeded in lifting it to 26. I am recommending a credit spread using the February 38/45 calls. There will not be a stop loss on this position because any spike in volatility that succeeds in lifting the VXX that high is likely to be very brief.
When the VXX was first introduced, it was considerably higher than it is today. When accounting for splits to keep is listed, it has traded well over 1,000. The vehicle is flawed and like so many other futures ETFs it has slowly declined over the years as fewer investors trade it. The flaw is obvious when the extreme volatility over the last three weeks has been unable to power it much higher.
Sell short Feb $38 call, currently .82, no stop loss
Buy long Feb $45 call, currently .52, no stop loss
Net credit 30 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.
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.