We will know very soon if there is going to be a "Sell in May" event for the fourth consecutive year.

We are 30 hours from May and the market was setting new highs on Monday. Apparently the flow of cash into the U.S., the QE from the Fed and the new high headlines is attracting cash to the equity markets. There is no other reason.

Earnings, economics and Europe are all negative but the market is continuing higher. Eventually fundamentals will matter but it may not happen until the Fed removes the punchbowl.

The FOMC meets this week with the announcement on Wednesday. Nobody expects any changes. Over the last week several Fed heads have actually talked about accelerating the QE program rather than slowing it down. The weak economics is causing concern that we may be headed for another recession. The FOMC announcement is not likely to rock the market as long as nothing changed in the guidance.

The market moving event should be the Nonfarm Payrolls on Friday. A number under the 88,000 we saw for March would be negative. The currently overextended market could easily panic and the May decline could begin.

I am worried the expected May decline is so expected by nearly everyone that it may not happen. Short interest is rising but the market continues to move higher. If the S&P were to break over 1600 we could see a monster short squeeze.

The S&P failed at the March 11th high of 1597 when it was retested on Monday. This is a perfect setup for a double top failure that begins the May decline. The setup is too perfect. It should not be this easy and that suggests we could be surprised.

I am not adding any puts today but I am adding some covered calls with fat premiums that will insulate us against a decline.

Jim Brown

Send Jim an email



Current Portfolio


Current positions


Current Position Changes


None


New Short Put Recommendations


None


New Covered Call Recommendations


TSLA - Tesla Motors (Covered Call)

Good news is breaking out all around Tesla. Sales are ahead of schedule. The company announced a new lease program. Last week Elon Musk announced a strong warranty on the battery to calm fears about future problems and replacements.

Shares of Tesla are rising sharply but as of April 12th more than 47% of shares were sold short. That would take 23 days of normal volume to cover. The company refuses to die despite the skeptics in the market.

The Tesla model S was selected as "Car of the Year" by Motor Trend. It comes in two models with a range of 215 or 265 miles per charge. That means as long as you plug in every night you are always ready for a road trip. Charging stations are popping up everywhere and you can get 150 miles of charge in 30 min.

The stock has gone vertical over the last month and option premiums are out of sight. I am recommending a May $55 covered call, currently $3.20. That is three weeks until expiration. If we are not called the high option premiums give us another chance to do it in June.

Buy-Write TSLA May $55 Covered Call, currently $54.94 & $3.20, no stop.

TSLA Chart


SCTY - Solar City (Covered Call)

Solar City engages in the design, installation, and sale or lease of solar energy systems to residential and commercial customers, and government entities in the United States. It provides solar energy systems, which convert the electrical output from the panels to usable current compatible with the electric grid. The price of solar has finally declined to the point where the normal homeowner can afford to install solar under the Solar City lease plan and forget about rising electric rates.

SCTY IPOed back in December and the stock has more than doubled in the last four months. Short interest has risen +25% since March 28th. The days to cover has risen to 6. As long as short interest is rising the short sellers are creating a potential short squeeze if the stock continues to rise.

I am recommending the June $25 covered call, currently $2.25. That is roughly 8% of the stock price and that gives us a cushion for profit taking.

Buy-Write SCTY June $25 Covered Call, currently $25.13 & $2.25, no stop.

SCTY Chart


New Long Term Recommendations


None


New Aggressive Recommendations


None


Existing Play Recommendations


Links to original play recommendation

RIG - Transocean (Covered Call)

BSFT - Broadsoft (Covered Call)

GMCR - Green Mountain (Covered Call)

MNST - Monster Beverage (Short Put)

SLW - Silver Wheaton (Covered Call)

PCYC - Pharmacyclics (Short Put)


Margin Requirements:

There are several different formulas for determining margin requirements for naked put writing. These are normally broker specific and some can require larger margin requirements than others.

Here is the most common margin calculation for naked puts.

100% of the option premium + ((20% of the Underlying Market Value) - (OTM Value))

For simplicity of calculation simply use 20% of the underlying stock price and you will always be safe. ($25 stock * 20% = $5 margin)


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.