Eventually this market is going to correct. Of course analysts have been predicting that for three months.

If the futures are any indication of Tuesday's market the Dow is going to have a hard time stretching its consecutive string of Tuesday gains to 21 weeks. The S&P futures have been down as much as -6.25 as of 11:PM ET but they have recovered somewhat. There is still a lot of darkness before morning and anything is possible.

We could even open down -100 points and the markets could return to positive territory by the close. Monday's ISM disappointment was met with a big decline on the S&P and Nasdaq and they recovered along with the Dow to close strongly positive.

Bad news is good news and whatever is pushing the futures lower tonight may become good news by morning if it appears it will keep the QE faucet flowing full blast.

The obvious elephant in the room is the rapidly declining economics but traders are choosing to overlook the elephant and focus on the QE.

The sudden appearance of market volatility has caused some of the high flyers to retrace their gains and I am closing two plays today and putting a stop loss on Herbalife. When volatility appears the traders in those stocks with hot gains like TSLA, SCTY, etc, tend to rethink their positions and take profits. There were several high profile downgrades today that dented gains in their sectors.

I am only adding a couple plays tonight due to the market volatility and negative futures.

Jim Brown

Send Jim an email



Current Portfolio


Current positions


Current Position Changes


JASO - JA Solar

The spike on the 21st of May has faded and we need to close the June $10 call so we can write a new one. The call is currently 20 cents. That will leave us with $1.80 in profit on that call. However, we are down $3 in the stock after Friday's dip.

I want to write a new July call but I want to do it on a spike rather than a dip. I want the calls to inflate first. The July $9 call is currently 55 cents. If we wait for JASO to rise to $8.50 we should be able to get $1 or more given the volatility in this stock.

Close June $10 call, entry $2.00, currently $0.20, +1.80 gain.
Sell to open July $9 call with a JASO trade at $8.50.

JASO Chart


HLF - Herbalife (Add Stop)

Herbalife has started to drift lower with no news on the billionaire battle and the weak market. We have a June $50 put and it is slightly underwater. HLF shares are $46 and support is $42.75-44.25. I am adding a stop loss at $42.50. With the stock drifting slowly lower I would expect Carl Icahn to say something to bolster his long position. I actually would not mind being put this stock as long as it is over support. Once that support breaks we need to bail and pay the piper.

Short HLF July $50 Put, entry $3.20, currently $5.90, -2.70

HLF Chart


SCTY - Solar City (Close)

We have a June $42.50 short put on Solar City and the stock broke support at $45 today to lose -$4.48. That puts the stock price under the strike price and we need to close it now for a breakeven while we still can.

We entered the play when the volatility was huge so we can still get out with a small loss despite the $4 drop.

Close SCTY June $42.50 Put, entry $4.60, currently $5.70, -$1.10 loss.

SCTY Chart


IOC - Interoil (update)

IOC has been nothing if not volatile after the announcement on the 24th about the deal with Exxon. Initially the stock gapped up then sold off on worries the deal may not be guaranteed. That worry appears to have faded last week as the stock rebounded to $90. Then they announced some new directors and the price faded again.

IOC investor relations people are the master of the press release. They release them by the dozens and I expect the concerns about the May 24th announcement to be covered in a subsequent press release. If the Exxon deal is valid and they can put the ghosts back into the closet the stock should head back for the recent highs. The Exxon deal appears to be transformational for the company and gives them legitimacy in the energy community. It also gives them about $4 billion in gas sales over the next decade with better than 50% of the reserves still unsold.

All of that means nothing if the deal falls apart. We have a July $80 put and the stock closed at $80 on Monday. Support is $75. IOC investors are accustomed to this type of volatility so let's hope they stick with it for another month.

Short IOC July $80 put, entry $7.70, currently $10.00

IOC Chart


New Short Put Recommendations


QCOR - Questor Pharma

This drug maker produces drugs I could not spell and I doubt anyone would recognize. However, it sells them to pharmacies to market under their own brands and to pharmaceutical wholesalers. They are making money and they have several new drugs in the pipeline.

The stock sold off in mid May on no real news after a big run. The selling has finally eased and support appears to be $34. It looks like the bears have left and the buyers are nibbling again. The support at $34 gives us a decent line in the sand for a stop loss and the premium is decent for a $35 stock.

Sell short QCOR July $32 Put, currently $1.70, stop $33.25

QCOR Chart


New Covered Call Recommendations


LGF - Lions Gate Entertainment Lions Gate scored another hit with the "Now You See Me" film that opened last weekend. This inexpensive film brought in $28 million and out did the high budget thriller with Will Smith "After Earth." I saw AE and it was a serious disappointment. LGF spent $70 million to make Now You See Me and they already sold the overseas distribution rights for $55 million. CinemaScore gave it an A- rating, which is pretty good and should guarantee it will be a strong draw over the next several weeks.

LGF also has the second chapter of Hunger Games coming out later this year and we know in advance this will be another blockbuster. The LGF chart is locked into a solid climb although it continues to see bouts of volatility as it rises. Thankfully that give us enough option premium to make it worthwhile.

I am recommending a covered call with a little reach on it to try and capture about a 10% return.

Buy-write LGF July $31 call, currently 80 cents. Profit if called $2.30.

LGF Chart


New Long Term Recommendations


None


New Aggressive Recommendations


None


Existing Play Recommendations


Links to original play recommendation

SCTY - Solar City (Covered Call)

HLF - Herbalife (Covered Call)

CCJ - Cameco (Covered Call)

PHM - Pulte Homes (Covered Call)

BZH - Beazer Homes (Covered Call)

GMCR - Green Mountain Coffee (Covered Call)

PPC - Pilgrim's Pride (Short Put)

SLW - Silver Wheaton (Covered Call)

BSFT - Broadsoft (Covered Call)

JASO - JA Solar (Covered Call)

HLF - Herbalife (Short Put)

SCTY - Solar City (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.